Days Working Capital: How Much Runway Does Your Business Have?

Getting ready to apply for a commercial loan, but not sure if your financials will receive an approval from the bank? This is part of a series of posts explaining financial equations and ratios so that you feel more prepared when you talk to the bank about your loan request. Next up: Days Working Capital.

What Is Days Working Capital?

Days Working Capital measures how many days a company's short-term assets (cash, receivables, and inventory) can cover business operations. By comparing the difference between a business's current assets and current liabilities against revenue, a business owner can determine how long they can float business operations without outside investment. The larger the number, the longer a business can operate with its current cash conversion cycle.

Important Note: Days Working Capital focuses on all current assets, not just cash. Stale Inventory and Aged Receivables can skew this math. Here's how you can calculate it:

Why Is It Important?

Days Working Capital helps business owners plan for short-term expenses and predict future needs to either seek outside investment or use their Line of Credit. By calculating this ratio, business owners can have more confidence in covering expenses such as payroll, sales tax payable, and rent. This ratio can help take the guesswork out of managing cash outflows.

Similar to other financial ratios focused on the calendar, Days Working Capital is a tricky ratio to monitor, because there can be room for improvement if the ratio is either too low or too high. A Days Working Capital number that is low can signal cash flow and solvency problems in a business, but a high number could mean that the business is not spending the money needed to grow the business.

The goal of Days Working Capital is to find the sweet spot of short-term assets saved in the business. Business owners want to make sure that there is enough money and incoming receivables/inventory to cover short-term operational expenses and unexpected repairs that inevitably pop up, while not hoarding so much cash that it begins to impact their ability to grow.

Example of the Days Working Capital Formula

ABC Company has annual business revenue of $1,000,000, current assets of $500,000, and current liabilities of $250,000. Its Days Working Capital would be:

What would happen if they wanted to increase their Days Working Capital to 4 months? By doing some reverse math, ABC Company would need to increase its current assets by roughly $85,000 to cover expenses for an additional month.